Mini Case: You have just graduated from the MBA program of a large university, a
ID: 2737637 • Letter: M
Question
Mini Case:
You have just graduated from the MBA program of a large university, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enjoyed it so much you have decided you want to “be your own boss.” While you were in the master’s program, your grandfather died and left you $300,000 to do with as you please. You are not an inventor, and you do not have a trade skill, which you can market; however, you have decided that you would like to purchase at least one established franchise in the fast foods area, maybe two (if profitable). The problem is that you have never been one to stay with any project for too long, so you figure that your time frame is three years. After three years you will sell off your investment and go on to something else.
You have narrowed your selection down to two choices (1) Franchise L: Lisa’s Soups, Salads, & Stuff and (2) Franchise S: Sam’s Wonderful Fried Chicken. The net cash flows shown below include the price you would receive for selling the franchise in Year 3 and the forecast of how each franchise will do over the three-year period. Franchise L’s cash flows will start off slowly but will increase rather quickly as people become more health conscious and avoid fried foods. Franchise L serves breakfast and lunch, while Franchise S serves only dinner, so it is possible for you to invest in both franchises. You see these franchises as perfect complements to one another: you could attract both the lunch and dinner crowds and the health conscious and not so health conscious crowds without the franchises’ directly competing against one another.
Here are the net cash flows (in thousands of dollars):
Expected Net Cash Flow
Year Project L Project S
0 ($150) ($150)
1 15 105
2 90 75
3 120 30
Depreciation, net working capital requirements, and tax effects are all included in these cash flows.
You also have made subjective risk assessments of each franchise’s risk characteristics, and you have concluded that both projects require a return of 10 percent. You must now determine whether one or both of the projects should be accepted.
1) What is the underlying cause of ranking conflicts between NPV and IRR?
2) Under what conditions can conflicts occur?
3) Which method is the best? Why?
Chegg, I need help with these 3 questions. I am confused. Please answer these 3 questions (not 1 question, not 2 questions, but all 3 questions) for me. Please do not use answers from the past because I looked at those, and they are not the answers that I am looking for. Lastly, please answer these 3 questions with explanation and detail. The more detail you provide, it will help me understand and explain the question more clearly. I hate to be a pain, but I need these questions for a take home exam. It is very important. Thanks in advance.
Explanation / Answer
calculation of npv and irr
Answer 1
The disadvantage withn IRR is that it is expressed in terma of Percenatge (%), irrespective of the size of the investment, where as in case of NPV , it works under both ie in mutually exclusive projects as well as in Independent project ie non mutual. Inb mutual exclusive projects we select project with Higher NPV regardless of size of investment, and in independent projects , we selct higher NPV indices.
Answer 2
Conflicts between both can be occur due to following reasons
Answwer 3
NPV is best as it takes decission in both mutually exclusive and independent projects on the basis of Higher NPV, and along withthis, we also had opporti=unity cost which helps us in providing cash flows for reinvestment at cost of capital.
Discounting factor @10% Cash flow of Project L CAsh flow Value of Project S present values of Project L Present Value of Project S 1 -150 -150 -150 -150 0.909 15 105 13.64 95.45 0.826 90 75 74.34 61.95 0.751 120 30 90.12 22.53 NPV $28.1 $ 29.93 IRR 18.13% 23.56%